Australia's consumer prices cooled in the third quarter with a key gauge of underlying inflation back comfortably in the middle of the Reserve Bank's 2-3 percent target band, giving the central bank room to hold interest rates low for longer.

Official figures released on Wednesday by the Bureau of Statistics showed the RBA's favored"trimmed mean" measure of the consumer price index (CPI) rose 0.4 percent on the quarter and 2.5 percent versus the same quarter a year ago.

The headline CPI was even lower with the annual rate slowing to 2.3 percent from 3.0 percent.

"I imagine that the Reserve Bank will be pretty happy with this outcome and it certainly will reinforce that period of stability in interest rates," said Michael Blythe, chief economist at the Commonwealth Bank of Australia.

Earlier this month, the RBA left its cash rate at a record low 2.5 percent, where it has been since the last cut in August 2013, and reiterated its pledge to keep rates steady for a while.

Analysts said inflation was pushed lower by the removal of a carbon tax, which in turn helped drive electricity prices down. Other factors included declines in automotive fuel, reflecting a drop in global oil prices.

In July, the Australian Senate voted to scrap the country's carbon tax and plans for emissions trading, a major victory for conservative Prime Minister Tony Abbott, who campaigned to have the tax removed during the 2013 election.

"We expect, however, that the removal of the carbon tax will impart further downward pressure on headline inflation in Q4, especially as indirect effects of the carbon tax repeal are passed through to other commodities," said Phil O'Donaghoe, economist at Deutsche Bank.

Underpinning inflation were price increases for fruit, home purchase costs and property rates, official figures showed.

The Australian dollar initially dipped to a session low of $0.8746 on the benign inflation outcome, but subsequently recovered to last trade at $0.8778.